A short time ago, John McCain said the chairman of the SEC (Securities and Exchange Commission), Chris Cox, should be fired. For making this statement many ridiculed McCain for being reactionary and hot headed.
Supporters of Chairman Cox have pointed out that the chair of the SEC has limited regulatory powers and hasn’t had the authority to regulate many of the activities which have brought on the current financial crisis.
On Fox News this afternoon some accounting experts pointed out some information that would indicate otherwise.
According to them, a simple change in accounting requirements which the chairman of the SEC does have the authority to effect might have averted the current crisis.
Let me see if I can explain this correctly.
Current accounting regulations require that the mortgage packages have to be valued at what they would sell in the current market. This would value the mortgage packages at whatever they would sell for even under the worst conditions which these instututions currently face. This has caused a continuing downward spiral in the value of all the loan packages as if they all had to be sold today … at current market prices … as if they all had to be sold at a fire sale, regardless of whether the mortgages in the packages were being properly serviced by current home owners.
In other words, the mortgages of the 95% of the people who are actually making regular payments on their loans are being treated as having the same value of the loans of the less than 5% who have defaulted on their loans.
How does this affect the credit market? As the values of the loan portfolios have contracted because they all have to be valued as if they had to be sold today or were all literally worth nothing, this has caused a contraction on the perceived value of the bank’s assets which in turn has caused a contraction in the amount of credit a bank can extend.
In other words, a bank can only loan a multiple of its assets. The example given was a bank being able to make loans valued at 10 times its assets. If the assets are forced through accounting rules to be devalued from $100 billion to $10 billion, then the credit a bank can extend decreases correspondingly.
What does all of the have to do with the chairman of the SEC. Apparently, he has the authority to change the accounting rules so that the banking or investment institutions could change how they value their assets … say to fair market value or some other standard. One mentioned was basing the mortgages on current rental or mortgage payment income.
Let’s face it, we aren’t paying our property taxes based on the value of a forced sale of our homes. We all know if we had to sell our homes today we’d take a beating and only receive a fraction of its true worth.
Imagine the effect on cities, counties and state governments if they had to change their property assessments to the worst case value of the properties within their jurisdictions.
Well, that’s exactly what’s being done to the investment banks and commercial banks.
And, apparently, the chairman of the SEC has the authority to change that. It appears that if he had, that action might have been one of the things that could have been done to avert the current crisis.
Maybe, John McCain was right to recommend firing Chris Cox.
Filed under: Commentary, Financial News, News, Politics | Tagged: accounting practices, Chris Cox, financial crisis, fire SEC chairman, Fox News, John McCain, SEC, SEC chairman, Securities and Exchange Commission |